EXCHANGE RATES AND INTERNATIONAL RESERVES: A THRESHOLD ERROR CORRECTION AND A THRESHOLD GRANGER CAUSALITY ANALYSIS

Abstract

During the last three decades, globalization has become one of the most important issues in the world economies. Capital flows to developing countries increased dramatically. During this period many economies witnessed financial crises due to a sudden stop of capital flows. This paper investigates the relationship between international reserves and exchange rates in the Turkish economy by using the threshold error correction model and the threshold granger causality test. I found that there is a bi-directional causality between international reserves and the exchange rate of Turkey, in other words, that international reserves and exchange rate are jointly determined and affected.